Whenever we talk to clients about their portfolios, we always tell them to assume, always, that ANY of their stocks could go down 50 per cent, quickly. Even those blue-chip stocks an investor might think are perfect, or ‘bullet-proof’, can still get shellacked, whether due to company issues or just market conditions.

Forcing this type of negative thinking helps investors frame their risk tolerance. It is also a very helpful exercise for investors who have concentrated stock positions. Sure, a stock might have done well, and might represent 14 per cent of a portfolio. But clients would not want to see a 7 per cent total portfolio decline, which of course is what would happen if that large concentrated position ran into trouble. Such a hit can devastate a portfolio. Ignoring that possibility doesn’t mean it won’t occur!

Many investors have experienced this event, sadly, in the market sell off of the past few months. Many stocks that seemingly did nothing but go up have suddenly reversed course, sharply. Big gains have turned into giant losses. It has been ugly. Investors everywhere, not used to such drops, are panicking and adjusting their portfolios, perhaps at the wrong time.

Let’s take a look at five stocks which have dropped 50 per cent, quickly. We will note how long it took for that decline to play out, and try to gauge their prospects for recovery. Of course, since math is so cruel, a 50 per cent drop means a stock needs to go up 100 per cent for you just to get back to even.

Nvidia Inc. (NVDA on Nasdaq)

High: $292.76 on Oct. 2. Days to get cut in half: 48. After knocking it out of the park for five years, at least, Nvidia came out with a very weak forecast with its third-quarter earnings report. Momentum investors knocked themselves over trying to get out of the stock at the same time. Growth stocks can get very ugly when growth slows, or worse — reverses.

The prospects: Not bad. Shares are trading now at 19 times earnings, and for that you get a world technology leader in several high-growth sectors. NVDA has no debt and $5.5 billion cash, and also generates about $4 billion in free cash flow annually. It likely will recover well whenever the tech sector decides to go back up.

Viamed Healthcare Inc. (VMD on TSX)

High: $8.75 on Oct. 17. Days to get cut in half: 34. VMD was spun out of Patient Home Monitoring (now called Protech Home Medical Corp, PHM on TSX-V). PHM had a bit of a checkered history, but VMD came out of the spin off and did very well right away. This week the stock plunged, prompting the company to comment that CMS (Medicare and Medicaid in the U.S.) was thinking of adding ventilators to new CMS codes. Investors always worry about changing codes, of course, because the government is continually trying to drive healthcare costs lower.

The prospects: Hard to say here. VMD says even with new codes, nothing goes into effect until January 2021 at the earliest.

Maxar Technologies (MAXR on TSX)

High: $86.67 on Dec. 8, 2017. Days to get cut in half once: 318 ($40.52 on Oct. 22). Days to get cut in half again: Nine. MAXR has the dubious distinction of being cut in half twice this year, with shares now in the low $20s, down a whopping 73 per cent on the year. On Oct. 31, the company guided its earnings lower, but the third quarter results themselves were a mess. Earnings missed consensus by 26 per cent. Short sellers — who had earlier this fall knocked the stuffing out of the stock — rubbed their hands with glee.

The prospects: Not so good. MAXR can’t seem to hit any forecasts, and analysts expect little growth from 2019 to 2020. The company has taken its ball and gone home — this week its shareholders approved its U.S. domestication, meaning, it is no longer a Canadian company.

Photon Control (PHO on TSX)

High: $2.60 on June 13, 2018. Days to get cut in half: 149. Photon serves the semi-conductor industry, and it is seeing a capital spending slowdown. Now, even though the company warned investors of this months ago, its third quarter report still came as a shock to some, and the stock took a further hit when it was released.

The prospects: Pretty good. PHO has some new products on the way, and is debt-free, sitting on $43 million cash, now close to 40 per cent of its market value. It will be here when the next semi-conductor spending cycle starts, and patient investors should be rewarded.

Guyana Gold (GUY on TSX)

Price: $3.29 on Oct. 18, 2018. Days to get cut in half: 14. GUY, a $12 stock in 2007, is now at $1.35, meaning there are plenty of starting points you can pick when calculating a 50 per cent decline. The most recent decline accelerated on Oct. 30, when the company lowered its gold production guidance and said it is reviewing its underlying resource potential. This is code for ‘we might have some grade issues, higher costs, or other mining issues to deal with.’ Later, there were also some board departures, and the CFO took a medical leave. Investors have had enough, with the stock down 73 per cent this year now.

The prospects: GUY remains in a net cash position, and generates decent cash flow. But the stock has seen multiple broker downgrades, and we would expect it to see some tax loss selling in December. We might expect a January bounce here but it is pretty hard to endorse it for anything other than a ‘bounce’ trade.

Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (http://www.5iresearch.ca).

For Medicine Hat, three years of low prices and big losses were too much to ignore

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